Trusts Flourishing in China, for Now

By

Dinny McMahon

May 8, 2013 10:49 a.m. ET

BEIJING—Chinese investors poured more than $200 billion into trust investments, the main part of the country's shadow banking system, in the first quarter, but the industry warned it faces tougher competition as banks and brokerages encroach on its turf.

ENLARGE

The China Trustee Association said Wednesday that trusts, a type of wealth-management company common in China, had 8.73 trillion yuan ($1.42 trillion) of assets under management at the end of March, up 17% from three months earlier. That growth was led by financing of infrastructure projects, which received 461.3 billion yuan of new funding from trusts in the first quarter, almost five times the amount a year earlier.

With Chinese savers short of good investment options—the country's stock markets have yet to recover from a 2008 crash and government efforts to curb property speculation have made it difficult for people to park excess cash in real estate—trust companies have come to dominate China's wealth-management sector by giving investors a way to make money through lending to companies that need cash.

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But trusts are now warning that the days of runaway profits may be over as the government moves to restrict lending in areas where the trusts have been most active and as new regulations allow other financial institutions to provide services that were once the primary domain of trusts.

Last year was a banner year for China's trust companies, whose profit growth exceeded that of the country's big banks. Citic Trust Co., China's biggest trust company, with almost 600 billion yuan under management, said in its earnings report that its 2012 net profit rose 42% from a year earlier. Citic Trust is a unit of Chinese financial conglomerate Citic Group Corp. National Trust, meanwhile, said its net profit rose by more than 80% in 2012.

In October, the China Securities Regulatory Commission introduced new rules relaxing restrictions on securities companies offering wealth-management services. Since then, securities firms have expanded the volume of entrusted assets—an area previously dominated by trust companies—they have under management. At the end of last year, securities firms' entrusted assets came to 1.89 trillion yuan, up from 480.2 billion yuan six months earlier, according to data from the Securities Association of China.

A recent report from CitigroupC-0.71% says much of this new business is in cooperation with the trusts, which are using the securities companies to get around government restrictions on trusts packaging investment products for banks to sell to their customers, a huge market.

However, as securities companies gain more experience in wealth management, they could pose a threat. China Galaxy Securities Co., a Chinese brokerage firm that is aiming to raise about $1.4 billion in an initial public offering in Hong Kong this month, has more than five million brokerage clients across China and 299 branches, according to its prospectus. Trust companies lack similar networks and are heavily reliant on banks for sales.

Moreover, with Beijing having placed a moratorium on IPOs on exchanges in the cities of Shanghai and Shenzhen, and stock-trading volumes having been sluggish since the market crash, securities firms are keen to find new sources of revenue.

"We have been rapidly transforming our traditional brokerage branches into wealth management centers that provide a comprehensive suite of brokerage and wealth management services," Galaxy said in its prospectus.

Some trust companies have also warned in their earnings reports that government efforts to curb lending to the property sector and to local-government developments—two key areas of trust lending—present challenges to further growth. While infrastructure lending expanded aggressively in the first quarter, Beijing has repeatedly flagged the need to bring the finances of local governments, which are largely responsible for such projects, under control.

The biggest threat to the trusts could be their own success. At the end of March, total trust assets under management were 65% larger than a year earlier, putting pressure on trusts to find places to invest.

"The rapid expansion of trust assets in 2012 has possibly increased the industry's credit risk and liquidity risk," National Trust said in its earnings report. "If and when a trust product runs into redemption problems in the future, the development of the whole trust industry could be headed for trouble."

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